GBP/USD bulls fail first attempt to break 1.3450 critical round number

• GBP/USD bulls are trying to take charge at 1.3450 despite the risks of a fresh covid wave.
• Brexit headlines will be important for the week ahead also.
• BoE sentiment is for a rate hike in Dec, but will covid disrupt this?

At the time of writing, GBP/USD is attempting to correct a daily bearish impulse and is trading 0.18% higher on the day so far. GBP/USD has travelled from a low of 1.3402 to a high of 1.3449, scoring to the high in recent trade as bulls take on daily resistance with 1.3480 eyed. 

The pound has been edging higher at the start of the week although post-Brexit trade arrangements for Northern Ireland remain a risk. Relations between the UK and EU have been frayed due to the brinksmanship over the Britians threats to trigger an emergency clause known as Article 16 of the Northern Ireland Protocol. The pound is especially vulnerable as the prospect of a trade war is an outcome that would be expected to leave the UK worse off by comparison. 

European Commission's Maros Sefcovic said the EU will consider all of the tools at its disposal if the UK Government triggers Article 16. ''If the British Government suspends the Northern Ireland Protocol, it will have “serious consequences” for the region and Brussels’ relationship with the UK.

However, on the more positive side, he said, ''Last Friday, I held my fourth weekly meeting with David Frost on the EU package of solutions.''

“I acknowledged and welcomed the change in tone of this discussion compared to previous ones. After weeks of intensified discussions, we need the UK to reciprocate the big move the EU has made. The EU has taken big steps to find solutions and to provide solutions to concrete problems faced by Northern Irish people and businesses on the ground as a consequence of the Brexit chosen by the UK.”

Mr Sefcovic said he would not speculate on whether the UK will trigger Article 16. Britain and the European Union will intensify efforts this week to find a solution.

GBP traders get mixed messages in futures and options

Meanwhile, looking at the options and futures markets, there are mixed messages.

On the one hand, the weekly CFTC positioning data is telling that speculators have increased their longs on the pound versus the dollar. But on the other hand, the one-month risk reversals that are a gauge of the market's expectations of the pound's direction, have hit their lowest since December 2020 on Thursday last week. The gauge is in negative territory which indicates the market expects the pound to fall, probably likely to the following...

GBP to face Covid risks on the horizon

In starkly riskier headlines, Europe's latest covid storm is expected to affect the UK. The PM Boris Jonson stated:

1. Iit is unclear how the "storm clouds" of the new wave of Covid in Europe "will wash up on our shores".
2. He urges people to get vaccinated "as soon as...eligible", and says it would be a "tragedy" if double-jabbed people fell ill without their booster.
3. Asked if he can rule out Christmas lockdown, PM says current data does not point to the need for a Covid "Plan B".
4. England's chief medical officer, Chris Whitty, renews the call for pregnant women to get vaccinated
5. The UK's top vaccine advisers, the JCVI, say all over-40s should be offered a third dose of a Covid vaccine.
6. The medicines regulator, the MHRA, says it is safe for people aged 16-17 to have second Pfizer/BioNTech vaccine dose.

(Source: BBC)

This leaves the pound vulnerable to risk-off and heavy selling, especially in light of the recent rhetoric from the Bank of England and surprise interest rate hold. 

BoE Dec rate hike sentiment in jeopardy 

The risks are mounting for the Bank of England to hold again at their next policy meeting in December. The BoE left rates on hold, much to the surprise of the markets following a number of hawkish tilts of the hat leading into the meeting from various MPC members. The BoE signalled that a rate hike will be appropriate in the coming months if data is broadly in line with expectations.

Governor Andrew Bailey linked rate hikes to labour market outcomes. However, should there be risks of a fresh wave of covid in the UK as a result of mainland European contagion, then rate hikes could well be off the menu for the foreseeable future. As it stands, however, markets are pricing in approximately 90bp over a period of between 2022-late 2025.

GBP/USD technical analysis

There are prospects of a deeper correction on the daily chart as per the bullish momentum and market structure on the hourly chart. 

As illustrated, the price is headed into daily resistance and correcting the latest bearish daily impulse, testing the 38.2% Fibonacci retracement level. There is room to go to the 50% mean reversion level though that meets the firmer resistance near the November 4 & 8 closing and opening levels respectively near 1.3480. 

GBP/USD H1 chart

The inverted head-and-shoulders formation is a bullish pattern. Given that the price is being supported by the hourly dynamic trendline, there are prospects of a bullish continuation towards the 1.3480s.